Selling (Out) the Future

In government, when times get tight, public officials turn to the sale of assets—the equivalent of selling the family jewels.

In farming it is called "eating your seed corn." In government, when times get tight, public officials turn to the sale of assets -- the equivalent of selling the family jewels.

A recent Wall Street Journal article documented the stampede of governments turning to privatization and asset sales during these tough economic times:

California is looking to shed state office buildings. Milwaukee has proposed selling its water supply; in Chicago and New Haven, Conn., it's parking meters. In Louisiana and Georgia, airports are up for grabs.

About 35 deals now are in the pipeline in the U.S., according to research by Royal Bank of Scotland's RBS Global Banking & Markets. Those assets have a market value of about $45 billion -- more than ten times the $4 billion or so two years ago, estimates Dana Levenson, head of infrastructure banking at RBS. Hundreds more deals are being considered, analysts say.

Proponents of privatization argue that it makes sense for government to take advantage of the private sector's greater operational efficiencies. There is some truth in this. Certainly, comparing the cost efficiency of services provided in-house with those of contractors makes sense.

There is a real danger, however, when government sells assets or translates a long-term revenue stream into a one-time infusion of cash and then uses the proceeds to plug a short-term budget gap. Rather than boosting efficiency, this can simply be another way to shift the burden of current government costs into the future.

It is one thing for government to shed unneeded assets, such as selling a golf course or fairgrounds. It is another thing entirely to "sell" state office buildings, as Arizona has done, only to enter into a long-term lease for their use while using proceeds of the sale to plug their budget gap. Notes the Wall Street Journal:

Much of the money is being used to plug the state's budget hole.

Such "one-time budget maneuvers" were cited in a Moody's Investor Services report recently to downgrade Arizona a notch. "We view these asset sales as 1-shots...that create structural budget imbalances in future years, but that may be necessary actions to bridge the time gap until revenue stabilization or growth returns," says Robert Kurtter, a managing director at Moody's.

Chicago did something similar with their parking meters. On the one hand, there is good reason to believe that turning over operation of the meters to a private firm would boost efficiencies and relieve the city of an operational headache. But Chicago has chosen to devote much of these one-time proceeds to short-term needs, as reported in an article by Nathan Hellman:

When Chicago leased its parking meters to a private company for 75 years, it received $1.16 billion. The city already has spent almost $973.6 million of that. Of this amount, more than 94 percent has been used for day-to-day needs.

A $422 million chunk of this parking meter money was woven into the city's 2010 budget -- including $250 million originally set aside for long-term needs. Much of the money was used to help fill last year's hefty budget gap.

Future citizens of Chicago will have to pay for all the services they receive, but they won't have revenue from parking meters to help out -- that will be long gone.

Indiana took a different, and preferable, approach. Of the cash proceeds from leasing the Indiana Toll Road for $3.85 billion, most went to retiring the debt on the road, and much of the remainder went to long-term infrastructure projects and a transportation trust fund.

In politics, good stewardship for the future often clashes with the realities of elections taking place right now. Politicians have learned how to shift costs onto the future, by underfunding pension funds. Now, through asset sales and leases, they have also discovered how they can pull revenue in from the future, as by converting a long-term revenue stream into a lump sum. It's like a time machine for money.

Tempting as these techniques may be, the future will face problems of its own. It's simply not fair to balance our budgets on the backs of future taxpayers -- who also just happen to be our children and grandchildren.